April 2, 2020
Nonprofit FAQ: Disaster Relief Payment under Code Section 139
Posted by COVID-19 Rapid Response Team
On March 13, 2020, the COVID-19 pandemic was designated as a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This designation provides the opportunity for employees to exclude certain “qualified disaster relief payments” from their gross income under Section 139 of the federal tax code. Such qualified payments are deductible to the employer and not included in the income of the employee.
What is a qualified disaster relief payment?
Qualified disaster relief payments are payments that are not otherwise reimbursed by insurance made to an employee who is reasonably expected by the employer to:
- Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, including additional expenses incurred for employees to work remotely due to the disaster
- Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster
The payments should not include non-essential, luxury or decorative items or services.
What is the federal tax treatment of qualified disaster relief payments?
Payments or reimbursements to an individual for qualified disaster relief are excludable from income to the extent not compensated for in another method (e.g. by insurance proceeds). The employer is not required to obtain documentation of actual expenses as long as the amount reflects a reasonable estimate of the individual’s losses and expenses attributable to the disaster. Employers that make payments that qualify as disaster relief payments are allowed to deduct the payments to the same extent as if the payments were includable in the employee’s income.
What needs to be considered for a charitable organization to provide disaster relief payments to its employees only?
The group of individuals who may properly receive assistance from a tax-exempt charitable organization is called a “charitable class.” A charitable class must be large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. If the group of eligible beneficiaries is limited to a smaller group, such as the employees, the group of persons eligible for assistance must be indefinite. To be considered to benefit an indefinite class, the proposed relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster.
How to set up a qualified disaster relief program?
While not explicitly required by Section 139, employers should consider adopting a written plan outlining when an employee is eligible for qualified disaster relief payments and limiting such payments only to reasonable and necessary expenses.
An organization must maintain adequate records that show the amounts paid, the purpose of the payments, and information to establish that distributions were made to meet charitable purposes and victims’ needs. Documentation should include:
- A complete description of the assistance
- Cost of the assistance
- The purpose for which the assistance was given
- The charity’s objective criteria for disbursing assistance under each program
- How the recipients were selected
- The name, address, and amount distributed to each recipient (but see below regarding short-term emergency assistance)
- Any relationship between the recipient and officers, directors, or key employees of or substantial contributors to the organization
- The composition of the selection committee approving assistance
A charitable organization that is distributing short-term emergency assistance should maintain the documentation noted above except for records of the name, address, and amount distributed to each recipient. Instead, organizations providing short-term emergency assistance should maintain records that describe the date, place, and estimated number of victims assisted. Examples of such short-term emergency aid would include blankets, hot meals, crisis shelter, electric fans, coats, hats, and gloves.
We’re Here to Help
For the latest regulatory updates and more information on keeping your business running through disruption, visit our COVID-19 Resource Center.
These are unprecedented times. And we know you, your families and your organizations need support, now more than ever. Our top priority as your trusted advisor is to ensure we’re helping you through these tough times. Visit COVID-19 Rapid Response Resource Center for our crisis management resources and contact information for our COVID-19 Rapid Response Team Leaders.